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Pakistan\'s debt: Putting the record straight – I

Mohammad Ishaq Dar | Published: February 01, 2017 21:08:46 | Updated: October 25, 2017 01:14:07


Economic indicators are always open to interpretation and debate. Some analyze these numbers objectively whereas others fall prey to their biases. In the latter case, analysts gather and present only selective information and analyze it on the basis of their preconceived notions. Unfortunately, few analysts in Pakistan are also not immune from such biases. What they do not realize is that by misinterpreting the facts and figures of extremely important indicators, they are doing a disservice to the Country. They fail to realize that their analysis based on selective data may dampen confidence of both the domestic investors as well as external partners (investors, creditors, etc.). Fortunately, international organizations including World Bank, International Monetary Fund (IMF) and Asian Development Bank (ADB) as well as credit rating agencies, have proved to be objective in their analyses and assessments.
The case in point is the public debt management. Some inherently sceptical analysts have gone overboard with predictions of doomsday scenario for Pakistan's debt and liabilities. Not surprisingly, their analyses are largely built on misinterpretations rather than facts. It must be understood that the contours of public debt management are complex. This process involves dealing not only with budgetary requirements of the country but also maintaining a fine balance between cost and risk, developing an efficient and deep secondary debt market, and maintaining the public debt at a fundamentally sustainable level.
As I had highlighted in an article in March 2016, debt management has taken special emphasis in our public financial management. This is so because persistently large fiscal deficits of previous successive governments have caused a significant growth in the volume of public debt over the past few years. The vision of our government is not just to bring the debt-to-GDP (gross domestic product) ratio in line with existing statutory limit of 60 per cent, but also to scale down this limit to 50 per cent in 15 years, starting from FY2018-19. Side by side, we have also put statutory upper limit of 4.0 per cent on federal fiscal deficit. Necessary amendments in Fiscal Responsibility and Debt Limitation Act (FRDLA) in this regard have been passed in June 2016 by the Parliament. Such far-reaching measures are going to bring further structured discipline in our debt management. As for now, let me present below few points to address common misperceptions.
MOST OF THE PUBLIC DEBT IS DOMESTIC AND NOT EXTERNAL: At the outset, there is a need to have clear distinction between domestic and external components of public debt, since each category carries a different risk profile. As at end June 2016, the country's gross public debt was Rs.19.68 trillion and net public debt stock was Rs.17.83trillion, of which the net domestic component was Rs. 11.78 trillion and the external component was Rs.6.05 trillion. Thus, net domestic debt constituted around 66 per cent of net public debt, while the remaining 34 per cent was external debt.
FRESH MOBILIZATION HAS A LONGER MATURITY PROFILE: Government is adhering to the MediumTerm Debt Management Strategy (MTDS) for the period 2015/16-2018/19 to make public debt portfolio more sustainable. As per MTDS, the government is focusing on extending the average time to maturity of domestic debt through mobilization mainly in the form of medium to longer tenor instruments like Pakistan Investment Bonds (PIBs). Medium to long-term debt, which consists of permanent and unfunded debt, amounted to Rs.8.6 trillion as at end June 2016, witnessing growth of 13.7 per cent year-on-year. In contrast, the short-term debt, which composed of primarily treasury bills, increased by only 8.4 per cent year-on-year.
Refinancing risk was one of the most significant issues in Pakistan's public debt portfolio, driven primarily by the concentration of domestic debt in short maturities at the end of June 2013. The refinancing risk of the domestic debt is reduced significantly at the end of June 2016 as indicated by percentage of debt maturing in one year which reduced to 51.9 per cent compared with 64.2 per cent at the end of June 2013. Accordingly, Average Time to Maturity (ATM) of domestic debt has increased to 2.1 years at the end of June 2016 as compared with 1.8 years at the end of June 2013.In line with the MTDS, the government intends to increase the ATM further keeping in view the cost vs. risk trade-off. As any financial expert would agree, lengthier the maturity profile of domestic debt, lesser the interest rate and refinancing risks.  In addition, longer maturities in PIBshelp in deepening the debt capital market and will assist in building a yield curve to bring more price stability.
SERVICING BURDEN HAS BEEN REDUCED: The timing of this shift in maturity profile is also helpful. The current low domestic interest rate environment has enabled the government to manage its debt servicing cost, going forward. Certainly, the cost of extending the incremental ATM is relatively smaller than the gains on account of reduction in refinancing risk and protection against increase in interest rates as domestic debt re-fixing in one year is reduced to only 52.8 per cent at end June 2016, compared to 67.2 per cent as at end June 2013. An important aspect of having more domestic debt is that it inherently has a low intensity of roll-over risk compared to the external debt. Specifically, the debt denominated in local currency can be readily refinanced with an appropriate mix of treasury bills and investment bonds. The fortnightly auction of T-bills and monthly auction of PIBs of various maturities provides a well-functioning and systematic avenue to facilitate refinancing.  
REFINANCING/REPAYMENT BURDEN IS STAGGERED, NOT CONCENTRATED: Here, it is also important to highlight that the entire amount of debt does not mature on the same day. Rather, it becomes due over a period of time which enables the government to plan its schedule of repaying or rolling over existing debt and go for a new period which is decided taking into account the prevailing cost of borrowing, prospects of rate for coming periods and matching it with tax collection pattern. [The next installment of the article will be published on Saturday.]  
Senator Mohammad Ishaq Dar is Fellow Chartered Accountant and Federal Finance Minister of Pakistan. The article has been forwarded to the FE by the Pakistan embassy in Bangladesh.
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